The Week in Review: January 13, 2020
The Middle East, Oil, and U.S. Production
In the past, chaos in the Middle East barreled into the price of oil. In August 1990, Iraq’s invasion of Kuwait lit a fire under crude prices. Adjusted for inflation, the price of oil nearly doubled.
*oil adjusted for inflation; today’s dollars as adjusted by the Consumer Price Index; WTI Crude Oil5
Prices didn’t fully retreat until it became clear Iraq would be defeated, and the global oil supply was secure.
Today, turmoil in the Middle East has a much smaller effect. A mid-September attack on Saudi Arabia, which is the #3 global oil producer behind #2 Russia (Energy Information Administration-EIA), temporarily took almost 6% of the world’s global oil production offline. Reaction in oil prices was muted.
As the year began, the U.S. killed Iran’s top military leader. The uncertainty created by the strike had even less of an impact on oil prices.
Side-stepping the political ramifications and analyzing events through a narrow economic lens, the surge in U.S. oil production over the last ten years has had a calming influence on global markets.
No longer is the U.S. economy held hostage by events in the Middle East. Today, the U.S. is the world’s number one producer of oil, accounting for nearly 13% of global supply (EIA).
In 2005, the U.S. imported about 13 million barrels per day of oil and oil-related products. While weekly numbers vary, the U.S. exported 610,000 barrels per day of oil and related products in the week ended January 3 (EIA). That’s a stunning turnaround!
The world is not as dependent on OPEC crude as it once was. Though prices did respond to recent events, reaction has been much more subdued. Further, the price spikes were short-lived.
It doesn’t mean economic danger and market volatility are behind us, but soaring U.S. production helps insulate the U.S. economy from supply shocks, reducing economic uncertainty.
Final thoughts
Despite the large number of possible outcomes we may have witnessed, the initial decline in stocks suggested investors were not expecting fast-moving events to spiral out of control.
In fact, the S&P 500 Index’s 0.71% drop in the day that followed the initial attack was modest and had been eclipsed just four weeks prior, when the index fell 0.86% on Dec. 2 (St. Louis Fed Reserve).
We shouldn’t be surprised if we see additional turmoil in the region, and day-to-day volatility can’t be ruled out. Historically, however, geopolitical tensions have not had a longer-lasting impact on U.S. stocks as global tensions have rarely had a lasting impact on the U.S. economy.
Two for the Road
Global stock markets gained $17 trillion in value in 2019.- CNBC, December 24, 2019
In the fall of 2019, the average size of the hole in Earth’s protective ozone layer was 3.6 million square miles. That’s down from a peak of 10.3 million square miles in 2006. Last year's hole was even smaller than the one first discovered in 1985. - NASA, October 21, 2019
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